Income Multiple-Choice Questions Selected from Gleim Sections 3.1 - 3.4

1. Income Multiple-Choice QuestionsSelected from Gleim Sections 3.1 - 3.4 Circle the best answer to each of the following non-computational questions:

2. 3.1 Comprehensive Income When a business enterprise provides a full set of general-purpose financial statements reporting financial position, results of operations, and cash flows, comprehensive income and its components should Appear as a part of discontinued operations and extraordinary items. Be reported net of related income tax effects, in total and individually. Appear in a supplemental schedule in the notes to the financial statements. Be displayed in a financial statement that has the same prominence as other financial statements.

3. 3.1 Comprehensive Income Which of the following items should be reported as a component of other comprehensive income (OCI)? Unrealized loss on an investment classified as a trading security. Unrealized loss on an investment classified as an available-for-sale security. Realized loss on an investment classified as an available-for-sale security. Cumulative effect of a change in accounting principle.

4. 3.2 Income from Continuing Operations Under GAAP, comparative financial statements are Required for at least the current and the prior year. Required for at least the current and the prior 2 years. Recommended for at least the current and the prior year. Neither required nor recommended.

5. 3.2 Income from Continuing Operations Select the best order for the following items appearing in income statements:1. Extraordinary items 6. Dividends2. Income from continuing operations 7. Net income3. Discontinued operations 8. Revenues4. Prior-period adjustments 9. Expenses5. Taxes on income from 10. Income from continuing  continuing operations operations before income tax A. 9 -10 -8 -7 -6 -2 -4  B. 8 -6 -7 -1 -2 -5 C. 9- 10- 8- 6- 3- 2- 1 -4 D. 8-9-10-5-2-3-1-7

6. 3.2 Income from Continuing Operations The major distinction made between the multiple-step and single-step income statement formats is the separation of Operating and nonoperating data. Income tax expense and administrative expenses. Cost of goods sold expense and administrative expenses. The effect on income taxes due to extraordinary items and the effect on income taxes due to income before extraordinary items.

7. 3.2 Income from Continuing Operations The effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a Gain Loss A. Yes Yes B. Yes No C. No No D. No Yes

8. 3.3 Discontinued Operations For the purpose of reporting discontinued operations, a component of an entity is An operating segment or one level below an operating segment. A set of operations and cash flows clearly distinguishable from the rest of the entity for operational and financial reporting purposes. A separate major line of business or class of customer. A significant disposal group.

9. 3.3 Discontinued Operations Good Fast Foods (GFF) operates entity-owned stores and has franchise agreements with entrepreneurs in the East, South, and West Regions. During the current year, GFF committed to a plan to sell the entity-owned stores in the East and South Regions to its franchisees. These stores are classified as held for sale. In the East Region, GFF will receive future fees based on revenues from the stores and will continue to be significantly involved in post-sale operations. In the South Region, GFF will have no post-sale involvement in the operations of the stores, and their operations and cash flows will be eliminated from GFF's ongoing operations. 

10. 3.3 Discontinued Operations Assuming that each store to be sold is a component of the entity, GFF is required to report the results of operations of which stores classified as held for sale in discontinued operations? East Region South Region A. Yes Yes B. Yes No C. No Yes D. No No

11. 3.4 Extraordinary Items A transaction that is unusual in nature and infrequent in occurrence should be reported separately After Income from continuing operations and before discontinued operations. As part of income from continuing operations. In the notes but not in the income statement. After discontinued operations and before net income.

12. 3.4 Extraordinary Items An extraordinary item should be reported separately on the income statement as a component of income  Net of Income Taxes Before Discontinued Operations A. Yes Yes B. Yes No C. No No D. No Yes

13. 3.4 Extraordinary Items During the current year, both Raim Co. and Cane Co. suffered losses due to the flooding of the Mississippi River. Raim is located 2 miles from the river and sustains flood losses every 2 to 3 years. Cane, which has been located 50 miles from the river for the past 20 years, has never before had flood losses. How should the flood losses be reported in each company's current-year income statement?

14. 3.4 Extraordinary Items In year 1, hail damaged several of TonGan Go.'s vans. Hailstorms had frequently inflicted similar damage to Toncan's vans. Over the years, Toncan had saved money by not buying hail insurance and either paying for repairs, or selling damaged vans and then replacing them. In year 1, the damaged vans were sold for less than their carrying amount. How should the hail damage cost be reported in Toncan's year 1 financial statements? The actual year 1 hail damage loss as an extraordinary loss, net of income taxes. The actual year 1 hail damage loss in continuing operations, with no separate disclosure. The expected average hail damage loss in continuing operations, with no separate disclosure. The expected average hail damage loss in continuing operations, with separate disclosure.

15. 3.4 Extraordinary Items In the current year, Teller Co. incurred losses arising from its guilty plea in its first antitrust action and from a substantial increase in production costs caused when a major supplier's workers went on strike. Which of these losses should be reported as an extraordinary item? Antitrust Action Production Costs A. No No B. No Yes C. Yes No D. Yes Yes

16. 3.4 Extraordinary Items Which one of the following material events is most likely to be classified as an extraordinary item on an income statement? A write-down of obsolete inventories. A loss from disposal of a component of an entity as a result of a newly enacted law. A loss from sale of property, plant, or equipment used in a business that results from an expropriation. Again or loss from the exchange of foreign currency due to a major devaluation.

17. 3.4 Extraordinary Items In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold's gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Two transactions as extraordinary gains. Two transactions in income before extraordinary items. Effect of its own bond transaction gain in income before extraordinary items and report the Iron bond transaction as an extraordinary loss. Effect of its own bond transaction as an extraordinary gain and report the Iron bond transaction loss in income before extraordinary items.

18. 3.5 Statement of Retained Earnings The major segments of the statement of retained earnings for a period are Dividends declared, prior-period adjustments, and changes due to treasury stock transactions. Prior-period adjustments, before tax income or loss, income tax, and dividends paid. Net income or loss from operations, dividends paid, and extraordinary gains and losses. Net income or loss, prior-period adjustments, and dividends paid or declared.

19. 3.5 Statement of Retained Earnings Which of the following should be reflected, net of applicable income taxes, in the statement of equity as an adjustment of the opening balance in retained earnings? Correction of an error in previously issued financial statements. Cumulative effect of a change in depreciation method. Loss on disposal of a component of an entity Extraordinary item.

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